Wall Street on tenterhooks as Trump's tariffs raise global trade tensions

NEW YORK: Global markets are poised for a major shake-up on Monday after US President Donald Trump escalated trade tensions by enforcing tariffs on Canada, Mexico, and China, a move that could stifle economic growth and reignite inflation concerns.

In response, both Mexico and Canada, the US's top two trading partners, have vowed immediate retaliation, while China has warned of "counter measures," setting the stage for a volatile trading environment.

Last week, the emergence of China's DeepSeek AI model sent tech stocks tumbling, and ongoing uncertainty surrounding Trump's tariffs has had a negative impact on broader market sentiment.

The possibility of a global trade war poses a serious threat to US corporate profits, could drive inflation higher, and may reverse expectations of an interest rate cut in the US. Additionally, it could further weaken currencies like the Canadian dollar and China's yuan.

"I do think the markets are going to react to this," said Mark Malek, Chief Investment Officer at Siebert Financial in New York.

"Until now the market has really been on Trump's side, but that could change, and the market could challenge him for the first time," he added.

Trump's move, made through three executive orders, imposes 25% tariffs on most Mexican and Canadian imports, and 10% on Chinese goods, with the tariffs set to take effect on Tuesday.

In retaliation, Canada announced 25% tariffs on $155 billion worth of US goods, beginning with $30 billion on Tuesday and an additional $125 billion 21 days later.

"This is negative for CAD, MXN, and CNH, as well as overall risk," said Nick Twidale, Chief Market Analyst at ATFX Global in Sydney, referring to the Canadian, Mexican, and Chinese currencies.

Twidale expects significant fluctuations in currencies when Asian markets open, as any hopes for a resolution were dashed.

The Canadian dollar has been under pressure in recent days, reaching five-year lows near 1.459 per US dollar last week.

Mexico's peso could fall nearly 12% if the US enacts 25% tariffs, according to JPMorgan estimates.

Analysts are also predicting a sell-off in stocks and other high-risk assets when markets reopen on Monday.

Gene Goldman, Chief Investment Officer at Cetera Financial Group, noted that a combination of high valuations, tariff-induced inflation, and potential effects on Federal Reserve policy could drive declines in the markets.

With the S&P 500 near record highs, strategists at Evercore ISI suggest that the index could move 3% to 5% in either direction in the short term.

Tariff Impact
Barclays strategists had previously estimated that the tariffs could reduce S&P 500 company earnings by 2.8%, factoring in the potential fallout from retaliatory actions by the targeted countries.

The executive orders also include provisions allowing Trump to escalate the tariffs if the affected nations retaliate further.

Economists at Goldman Sachs have projected that broad tariffs on Canada and Mexico could raise core inflation by 0.7% and result in a 0.4% reduction in GDP.

The potential to push up consumer prices is particularly concerning for investors, who worry that a resurgence of inflation could prompt the Federal Reserve to halt its interest rate cuts.

The Federal Reserve paused its rate-cutting cycle last week, with Chair Jerome Powell stating that officials were "waiting to see what policies are enacted" by the new administration.

Klaas Knot, a policymaker at the European Central Bank, warned on Sunday that new US tariffs would likely lead to higher inflation and interest rates in the US, which could weaken the euro.

Europe is also facing the possibility of being targeted by US tariffs.

"It's only a matter of time before the EU is targeted," said Marchel Alexandrovich, an economist at Saltmarsh Economics in London.

"In the meantime, Canada's response with tariffs against US goods signals the risks to global trade and shows how things could escalate," he added.